Why “Fiduciary” Is More Than Just a Word
In investing, words are cheap. Everyone says they have your “best interest” at heart. Everyone claims they’re a “trusted partner.” But only one word – “fiduciary” – carries the full legal and ethical weight of a promise.
Even though we’ve probably heard the word fiduciary before, there is likely no other word that is more misunderstood by the investing public. I was talking with another financial professional in preparing this article, one with over 25 years of experience with a major investment firm, and he had difficulty defining the details of when a fiduciary responsibility is required. Please be sure to read the “Common Misconceptions” below.
A fiduciary is a financial professional bound by fiduciary duty: a duty of loyalty, a duty of care, and a duty to act in good faith. That means putting your needs ahead of their own, avoiding self-dealing, and steering clear of potential conflicts of interest.
This is important because the fiduciary standard is backed by law—the Investment Advisers Act, the Securities and Exchange Commission (SEC), and the Department of Labor (DOL) all define and enforce fiduciary responsibilities. Registered Investment Advisors (RIAs), fiduciary advisors, and Certified Financial Planners (CFPs) who accept fiduciary status commit to aligning their decisions with their clients’ best interests.
This article breaks down what a fiduciary investment process looks like. You’ll see how it differs sharply from two common alternatives:
- Research platforms and services for DIY investors, where you’re the chief investment officer, financial planner, and risk manager of your own life.
- Broker-based advice, where advisors from the traditional wire houses and brokerage firms may operate under the lower suitability standard, meaning they only need to recommend something “suitable,” even if it’s not in their clients’ best interests.
By the end, you’ll see how a fiduciary approach can better align your portfolio with your goals, protect your beneficiaries, and reduce both financial and behavioral costs along the way.
Step One: Establishing Goals and Priorities
A fiduciary begins not with a solution, even if you state a specific product at first. They will lead with questions such as:
- What do you want your money to do for you and your family?
- What financial goals matter most: retirement income, helping children, charitable giving, leaving a legacy, etc.?
- What’s your tolerance for risk, both financially and emotionally?
This should lead to many follow-up questions, but this deep discovery process is not about selling investment products. It’s about aligning your financial situation, time horizon, and values with an investment strategy.
Contrast this with other approaches:
- Broker-dealers may lead with investment options tied to their financial institutions’ offerings, such as proprietary ETFs, mutual funds, or structured products. Their focus can tilt toward products that generate commissions, creating potential conflicts of interest. These products will generally be offered in an unmanaged brokerage account, as opposed to separately managed accounts.
- Services such as newsletters, timing services, and possible auto traders that serve DIY investors may offer buy and sell signals, macro viewpoints, other investment tips, etc. They generally do not fall under the fiduciary requirement. The reputable services should have a prominent disclosure, but many do not. The rules of thumb or tips they provide are not necessarily connected to your long-term financial goals.
Without clear alignment between goals and strategy, the process of investment management becomes reactive instead of intentional. A fiduciary makes sure the foundation is strong before moving forward.
Step Two: Comprehensive Financial Analysis and Risk Assessment
Fiduciary responsibilities will extend beyond asking what you want and dig into what you have.
This may include:
- Income, expenses, and liabilities.
- Existing investment portfolio.
- Retirement plan balances and distributions.
- Tax situation.
- Insurance coverage.
Fiduciary advisors will use analytical tools, coupled with a deep understanding of your risk capabilities, to help you make informed decisions. These tools may measure how your investment portfolio may behave across thousands of scenarios, not just in the best-case or worst-case scenarios.
By contrast:
- Services for DIY investors often lean on simplistic heuristics (“own your age in bonds”) or act on your fear and greed.
- Broker-dealers may use surface-level profiling forms, which can logically justify a specific investment product.
The fiduciary standard of care requires more. It requires understanding your total financial situation before making investment decisions.
Step Three: Crafting a Diversified Portfolio
Fiduciary advisors construct investment portfolios using evidence, not hunches. That means they lean on:
- Broad diversification across asset classes, sectors, and geographies.
- Low-cost, tax-efficient investment products.
- May utilize academic research, not company-sponsored studies, to support and clarify their actions.
The goal isn’t to chase fads but to design a durable portfolio that grows wealth while managing risk.
Contrast:
- Broker-dealers may favor higher cost or proprietary products that generate fees for financial institutions. Some firms can create products that have the same cost as other solutions, but their advisors’ pay grid is affected greater by one product over another. They are not required to tell you every detail of their compensation pay grid.
- DIY services may overconcentrate in hot stocks, neglect asset allocation, or let your emotions drive investment decisions.
A fiduciary advisor avoids self-dealing, mitigates conflicts of interest, and sticks to clients’ best interests.
Step Four: Tax-Aware Portfolio Construction
Taxes can silently erode returns over time. A fiduciary process may explicitly account for tax impact, seeking to minimize “tax drag.”
This includes:
- Strategic asset placement.
- Tax-loss harvesting – when consistent with your overriding objectives.
- Roth conversions.
- Charitable gifting strategies.
Broker-dealers may not integrate this depth of tax analysis. DIY investors often overlook it entirely. Fiduciary advisors see tax strategy as part of wealth management, not an afterthought.
Step Five: Ongoing Monitoring and Rebalancing
A fiduciary doesn’t disappear after the portfolio is built. Ongoing monitoring is part of fiduciary responsibilities.
That means:
- Measuring performance against appropriate benchmarks.
- Periodic rebalancing to keep asset allocation in line with the overall plan.
- Making evidence-based adjustments instead of emotional ones.
In some instances, Brokers may trigger unnecessary transactions that generate commissions. DIY investors often panic in downturns or chase returns in booms, undermining long-term outcomes.
A fiduciary standard emphasizes discipline, rules-based decision-making, and avoidance of emotional pitfalls.
Step Six: Continuous Advice Beyond Investments
A true fiduciary process can go beyond picking investments. It may integrate:
- Retirement planning and distributions.
- Estate planning for beneficiaries.
- Insurance needs.
- Charitable giving strategies.
- Coordination with other service providers, like accountants or attorneys.
Wealth management can be more than an investment portfolio. It can be a financial ecosystem.
Some DIY investors may miss these connections. Brokers may focus narrowly on investment products. Fiduciary advisors weave everything together to align your financial goals with your investment strategy.
How Fiduciary Standards Protect Investors
Here’s the key difference: fiduciaries are legally bound to act in clients’ best interests.
That means:
- Avoiding conflicts of interest.
- Transparent, fee-only compensation.
- Acting with loyalty, care, and good faith.
Broker-dealers, regulated by FINRA, often operate under the suitability standard, which allows for potential conflicts of interest.
Obviously, DIY investors and those who market services to them, are accountable only to themselves. Like anything else we attempt on our own, we all have blind spots, can miss risks, and have emotional errors.
The fiduciary status is the highest standard of care in financial advice. It exists to protect investors from the hazards of self-dealing, biased product sales, and poor decision-making.
Common Misconceptions About Fiduciary Investing
1. “Fiduciaries are required to provide retirement planning, estate planning, insurance, or charitable giving strategies.”
While fiduciaries can address those areas, they are not required to provide those services to every client. A fiduciary does have a duty of loyalty and duty of care, but the legal obligation does not pertain to the actual scope of services. What this means is that for any investment advice they do provide, they must act in the client’s best interest (in good faith) and disclose conflicts of interest. The fiduciary obligation centers around a standard of care, not a menu of services.
2. “Fiduciaries are less expensive.”
Not necessarily. The actual costs involved with working with a fiduciary advisor are a function of the firm’s cost/profit structure, and not because they may be fiduciaries.
3. “Brokers and fiduciaries are governed by the same rules.”
No. Brokers operate under the suitability standard, as regulated by FINRA. Fiduciary advisors operate under fiduciary standards, as regulated by the SEC or state securities regulators under the Investment Advisors Act of 1940.
4. “Brokers can act as fiduciaries in certain situations.”
Yes. If the representative of the brokerage firm is also a representative of a Registered Investment Advisor (RIA), then they must operate under the fiduciary standard in some situations. Confusion often occurs when they are dually registered.
5. “A broker that is dual registered is always required to act in my best interest.”
As mentioned in #4, not necessarily. It depends on which hat they are wearing. If they are selling a brokerage account and charging commissions for products and services they recommend, they are functioning under the suitability standard. If they advise a separately managed account, managed by a third-party sub-advisor, and your only fee is an AUM fee, they may be acting as a fiduciary.
6. "If an advisor recommends a service that has higher costs than a similar service, then he is not acting as a fiduciary."
Not necessarily. A fiduciary advisor does have a duty of loyalty and a duty of care. In addition to the client’s best interests and good faith disclosure, the advisor must be able to justify the recommendation with evidence that it benefits the client’s financial situation and goals. The higher costs may end up being a benefit to the advisor, but if the higher fee benefits the advisor more than the client, then it is a breach of their fiduciary duty. If the higher cost program is recommended solely because it pays more, then that would violate fiduciary responsibilities. This process requires disclosure, justification, and documentation.
7. “A financial advisor that does not hold a Certified Financial Advisor CFP® designation cannot serve as a fiduciary.”
False. Suppose someone is a Registered Investment Adviser (RIA) or an Investment Adviser Representative (IAR) of an RIA. In that case, they are legally bound to act as a fiduciary whenever they provide investment advice for compensation. The CFP Board does require CFP professionals to act as a fiduciary when providing financial advice, but holding the designation is not required for someone to be legally bound to a fiduciary duty. Fiduciary status comes from regulation through the SEC and state laws. A CFP designation is awarded by a professional board.
The key is that an RIA is required to always act in your best interests, regardless of your investment. An advisor working with a Broker-Dealer may or may not be required to adhere to that standard, depending on what you invest in.
Tax and Behavioral Advantages of the Fiduciary Process
The fiduciary process may help to reduce taxes, but it is more likely to reduce behavioral costs.
Studies repeatedly show that investors underperform their own investments because of poor timing, buying high, selling low, or chasing fads. Fiduciary advisors act as a behavioral guardrail, helping clients make informed decisions rather than emotional ones.
That could be an invisible but powerful value.
Fiduciary Investment Process FAQs
What exactly is a fiduciary duty in investing?
It’s the legal obligation to put clients’ best interests ahead of the advisors.
How is a fiduciary different from a broker?
Brokers follow the suitability standard. Fiduciaries follow the fiduciary standard.
Do fiduciaries cost more than brokers?
Not necessarily. Fiduciary fees are transparent. Some broker fees can be hidden inside products.
What kind of investments do fiduciaries recommend?
Typically, low-cost ETFs, mutual funds, and evidence-based strategies, not proprietary products.
How does a fiduciary manage investment risk?
By aligning asset allocation to goals, diversifying broadly, and using benchmarks for accountability.
Can fiduciaries help with taxes?
Yes, through tax-aware planning and coordination with CPAs.
Are fiduciaries always fee-only?
Not always, but fee-only is the cleanest model with the least conflicts of interest.
How can I verify if someone is truly a fiduciary?
Check the SEC, FINRA BrokerCheck, or confirm if they’re an RIA or CFP with fiduciary responsibilities.
What role does behavioral finance play in fiduciary advice?
It helps clients avoid emotional errors and make disciplined, informed decisions.
Can fiduciaries help small investors, or are they only for the wealthy?
Fiduciaries serve a wide range of clients, including those just starting.
How do fiduciaries handle market downturns differently than brokers or DIY investors?
They follow any agreed upon trading restrictions, may have a more rules-based rebalancing process, and may help avoid panic-driven decisions.
What kind of reporting or transparency should I expect from a fiduciary?
Clear performance reporting, benchmark comparisons, and fee disclosures.
Learn More About Our Fiduciary Investment Process
A fiduciary process is structured, data-driven, tax-aware, and conflict-free. It minimizes emotional mistakes, avoids product-driven biases, and supports long-term outcomes.
In a financial world where many advisors talk the talk, fiduciaries walk the walk: aligning investment decisions with your financial goals, your beneficiaries’ future, and your peace of mind.
Remember: investing is personal, and every investing strategy has tradeoffs and opportunity costs. That will always be the case. What is different is how all the tradeoffs and costs are disclosed to you. Keep in mind that what worked for your neighbor or coworker does not mean it is right for you. Spend a few minutes with us to see if we are a good fit for each other.
Bob Porter is the President of Porter Investments. Porter Investments is a fiduciary investment management firm based in Houston, Texas, helping self-directed and hybrid investors gain professional guidance and grow their portfolios with tactical strategies. Bob's prior work at Fidelity Investments allowed him the opportunity to advise and study a diverse group of investors.
